What We're Reading ~ Analytical Links 7/10/13

On saving investors from themselves [WSJ]

Smart and stupid arguments for active management [Reformed Broker]

Incorporating right-brain thinking into your investment process [Investing 501]

How gold lost its luster [The Big Picture]

A dozen things I've learned about the psychology of investing [25iq]

Steel: an inferno of unprofitability [The Economist]

On dealing with a rising interest rate environment [WSJ]

30-year mortgage rates surge to highest level in 2 years [Zillow]

The Dow Jones Index between 1789 and today [Go Infront]

MJN, ABT, NSRGY: China investigates foreign makers of baby formula [WSJ]

DVA: dialysis pay would drop $970 million under CMS proposed rule [BNA]

DIS: An interview with head of ESPN John Skipper [HollywoodReporter]

Talk of mergers stirs cable TV's big players [NYTimes]

Labor market spider chart [Federal Reserve Bank of Atlanta]

The best investment advice you'll never get [San Francisco Magazine]

Merchant banks make a comeback [WSJ]

The scam Wall Street learned from the mafia [Rolling Stone]

A report on Corrections Corp of America (CXW) [Scribd]

Introducing the Winklevoss Bitcoin trust [FT Alphaville]

Mick McGuire on Cincinnati Bell, Corrections Corp & NCR Corp

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Mick McGuire of Marcato Capital Management.  He focuses on companies with market caps between $1-5 billion and employs activism where needed.  He previously worked for Bill Ackman's Pershing Square.  He pitched 3 ideas:


Long Cincinnati Bell (CBB)

Trading around an EV of 3.8bn, McGuire highlights that Cincinnati Bell is actually two companies in one: a legacy telecom company that generates cashflow but is declining and a data center/colocation business that is seeing 20% growth year over year.

Currently, CBB uses free cash flow to fund the data center growth.  The stock is disliked by both growth and yield investors so the solution is to split the businesses.

The company will be spinning off its data center business as a REIT.  Then the telco business can de-lever, pay a dividend and repurchase shares.  McGuire is looking for a December or Q1 initial public offering (IPO).  His sum of the parts yields a target price of $8.30.

We just posted yesterday how Marcato Capital Management filed a 13G on CBB and are now one of the largest owners.


Corrections Corp of America (CXW)

This is an oldie but goodie as McGuire's previous employer, Pershing Square, had also owned Corrections Corp in the past.  Marcato Capital Management says this is a name with a hard catalyst in the form of a REIT conversion.

McGuire has been working with Corvex Management on this one (Keith Meister's activist firm) and CXW is waiting on approval.

The fundamental thesis on this name is that there's an "acute overcrowding problem in public prisons."  McGuire argues that private prisons like CXW are a better option and there's significant barriers to entry here.  The average cost per bed is 80k+ for government versus 55-65k for private.  He also points to incremental margins being high.

Given the theme of REIT conversions this year in the markets, McGuire highlighted why it's beneficial to be a REIT: free cashflow by tax savings, superior credit rating, and cap rates.  He says CXW trading at 15x AFFO would be worth $50/share.


NCR Corp (NCR)

McGuire's last idea is National Cash Register (NCR).  They supply ATM's and point of sale (POS) devices.  They have an incumbent position in the market and ATM's are their primary focus.  He likes that they have high barriers to entry due to the frequent servicing requirements of ATMs (Diebold is their main US competitor).

He pointed out that emerging markets are driving growth and that there are often regional duopolies in the segment.  In North America, we're in the midst of a big upgrade cycle for money center banks but it's just begun for smaller banks.  The thought here is that banks pay up for advanced ATMs to reduce in-branch spending.

McGuire also points out that NCR is #2 in self-checkout point of sale, behind IBM.  This has been a big trend popping up around the country.

He points out that the growth is obscured by the company's underfunded pension.  The company issued $600mm in debt at 5% to help fund it.  Marcato Capital Management originally built their position in the spring.  He likes the 11% free cash flow yield and sees 35% upside.  He sees $3.80 in EPS in 2015.

For more from this hedgie, we've previously posted McGuire's 3 ideas from the Value Investing Congress.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Activist Investors Propose REIT Conversion For Corrections Corp of America (CXW)

Keith Meister's hedge fund Corvex Management just filed a 13D with the SEC regarding shares of Corrections Corporation of America (CXW). This activist filing signifies a brand new position for Corvex as they did not own it at the end of 2011 (the last disclosure).

Corvex has a 4.43% ownership stake in CXW with 4,410,000 shares. The 13D was filed due to regulatory thresholds being crossed on March 26th, 2012.

Longtime readers of Market Folly will recall that Bill Ackman's Pershing Square Capital previously owned a position in CXW (you can see their old thesis on CXW here). The hedge fund eventually sold out of the position entirely.

One of Pershing's former analysts, Mick McGuire, went on to form his own hedge fund: Marcato Capital Management. Marcato has actually joined Corvex in this activist endeavor as they own a 2.61% ownership stake in CXW with 2,596,023 shares.


Proposing a REIT Conversion

In the fine print of the 13D filing, the two hedge funds say that they think shares are undervalued and an attractive investment. They've had conversations with each other as well as management and the board to discuss various aspects of the business.

They've discussed enhancing shareholder value by converting the company into a real estate investment trust (REIT) for federal income tax purposes.

Corvex and Marcato believe that a REIT conversion would "result in a significantly lower cost of equity capital, increased growth prospects and a material increase in value for all the Issuer's shareholders based on current trading multiples of comparable publicly traded REITs."

This seems to be a trend as of late as American Tower (AMT) recently successfully converted to a REIT as well.


About Corvex

We've started covering Corvex because before founding the firm, Keith Meister was Carl Icahn's protege. He's now started his own event-driven firm and it's no surprise that he's taken an activist investment stance. It's been reported that Corvex was seeded with $300 million from Soros Fund Management.

Other senior managing directors at Corvex include Nick Graziano (formerly a portfolio manager at Leon Cooperman's Omega Advisors) and Michael Doniger (formerly a PM at SAC Capital's CR Intrinsic unit).


About Corrections Corp of America

Per Google Finance, CXW is "an owner and operator of privatized correctional and detention facilities and prison operators in the United States. As of December 31, 2011, the Company operated 66 correctional and detention facilities, including 46 facilities that it owned, with a total capacity of approximately 91,000 beds in 20 states and the District of Columbia."

Pershing Square Q3 Letter: Ackman Provides Updates on Positions

Bill Ackman's hedge fund Pershing Square's third quarter letter is pretty much an investor's dream. The manager provides commentary and updates on practically all of his positions and is the epitome of transparency. But then again, it's not necessarily that hard when you run such a highly concentrated book like Ackman does. Pershing Square of course is one of the 23 prominent hedge fund portfolios we detail and analyze in the new issue of our Hedge Fund Wisdom publication.

Pershing Square has returned 292.7% net of all fees since inception in 2004. For 2010, their main fund is up 7.6% year-to-date. The only real noticeable change in their portfolio is that they exited Landry's Restaurants, as the company was bought out.

Fortune Brands (FO)

A while back we highlighted Ackman's new position in Fortune Brands (FO). His letter highlights that he thinks their Spirits business is a great consumer niche as it has high barriers to entry, sustainable profit margins, and economic resiliency. What's comical here is that Ackman filed a 13D signifying his activist intent with the investment and even though he hasn't really done much in that regard yet, the stock is already up 40% since he purchased it. It appears though that management will work with Ackman to unlock value.

J.C. Penney (JCP)

The other new position in Pershing Square's portfolio is J.C. Penney (JCP). Ackman likes JCP's cheap valuation, solid assets, and brand name. Their average purchase price was $25.28 and the stock already trades north of $33. The hedge fund manager doesn't necessarily outline his thesis in the letter, though he does point out Vornado Realty Trust's (VNO) involvement in the stock. The publicly traded REIT also acquired a large ownership in JCP shares. In the past, we've highlighted Ackman's potential JCP real estate thesis.

Ackman notes that his firm sold some shares of their Kraft (KFT) and Target (TGT) positions to finance the purchase of their two new positions. The rest of Pershing Square's letter delves into updates regarding their positions in Automatic Data Processing (ADP), General Growth Properties (GGP), Howard Hughes (HHC), Corrections Corp (CXW), and Citigroup (C). This was interesting mainly because it's been a while since we heard from Ackman regarding his Corrections Corp position, a name we originally posted his investment thesis on.

Embedded below is Pershing Square Capital Management's third quarter letter to investors:



You can download a .pdf copy here.

In other recent investment ideas from Ackman, he recently declared he is bullish on housing. And interestingly enough, John Paulson says to buy housing as well.

Bill Ackman's Pershing Square Sells Automatic Data Processing (ADP): Q1 2010 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up is Bill Ackman's hedge fund Pershing Square Capital Management. Ackman runs a value and activist fund with a highly concentrated portfolio so it is ideal for tracking purposes. He received his undergraduate degree from Harvard and his MBA from Harvard Business School. As we recently reviewed, Ackman and the saga surrounding his short position in MBIA (MBI) is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. It's definitely worth a read if you want to learn more about Ackman, the short selling process, and perseverance in general. Additionally, for more background on Bill Ackman's hedge fund, we've previously detailed a profile of Pershing Square.

The positions listed below were Pershing's long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
Kraft Foods (KFT)


Increased Positions
Yum Brands (YUM): Increased position by 10%


Reduced Positions
Target (TGT): Reduced position by 0.51%


Positions With No Change
General Growth Properties (GGP)
Corrections Corp of America (CXW)
Landry's Restaurants (LNY)
Borders Group (BGP)
Greenlight Capital Re (GLRE)


Positions They Sold Out of Completely
Hyatt Hotels (H)
Automatic Data Processing (ADP)


Pershing's Entire Long US Equities Portfolio (by percentage of assets reported on 13F filing)

1. Target (TGT): 32.79%
   
2. Kraft Foods (KFT): 29.89%
   
3. Yum Brands (YUM): 17.56%
   
4. General Growth Properties (GGP): 11.62%
   
5. Corrections Corp of America (CXW): 6.55%
   
6. Landry's Restaurants (LNY): 0.84%
   
7. Borders Group (BGP): 0.55%
   
8. Greenlight Capital Re (GLRE): 0.20%
   

Given Ackman's concentrated portfolio, there's not a lot to cover in terms of portfolio adjustment. However, we want to first immediately address misinformation that is floating around in mainstream news land regarding Pershing Square's portfolio. Firstly, we'll start with the fact that CNBC yesterday wrongly reported that Pershing added 23.9 million shares of General Growth Properties (GGP). Other news outlets have mistakenly followed suit. This is merely the exact same position that Pershing has held all along. As we've detailed countless times, General Growth Properties traded on the pink sheets for a period of time under the ticker GGWPQ. When this occurred, these shares became a security that was not deemed reportable by the SEC. As such, Pershing Square still owned it but was not required to disclose it.

Fast forward to the present as the new 13F filings come out and you see that General Growth Properties is listed on Pershing's disclosure. This is merely because shares now trade on the NYSE under ticker GGP, a security that *is* deemed reportable by the SEC. So, people not familiar with tracking 13F's or those who blindly follow sorted data will be viewing what *looks* like a new position in GGP, but in reality, isn't.

Ackman was on television a few weeks back talking about how he thinks GGP could double over the next few years "if done correctly." One thing this disclosure does provide us is knowledge of Pershing Square's total equity ownership in GGP of just over 23.9 million shares. Since there was essentially a 'dark period' when no one knew how much equity they owned due to the disclosure issue we touched on above, we now get clarification. To get an idea as to Ackman's total position, we've in the past detailed Pershing's economic exposure to GGP as they own other securities as well.

Secondly, back in January when we covered Pershing's fourth quarter portfolio, we made special note that they had sold out of Hyatt Hotels as per a 13G filing and it is obviously just now reflected in their latest update. They only owned shares briefly as they purchased them sometime in the fourth quarter of 2009 and then sold them in the first week of January 2010.

Thirdly, regarding their stake in Yum Brands (YUM), we just wanted to highlight that they did not disclose this position until April 2010 when in reality they owned it as of December 31st, 2009. In their original 13F for the fourth quarter 2009, Pershing did not disclose their YUM position. But via an amended 13F in April, they all of a sudden disclosed the position. So now via the first quarter 2010 13F filing we see that they have since added to the position to the tune of 10%. Whew, got all that?

In terms of other recent portfolio activity not covered via 13F filing, we saw that Pershing sold its Sears Canada stake to Sears Holdings for around $560 million. Lastly, in the past we've covered a ton of Pershing's investment presentations regarding their positions and have posted links below for those of you wanting to learn about their specific investment thesis for each name:

- Pershing's presentation on Kraft (KFT)
- Pershing's Corrections Corp of America (CXW) presentation
- Pershing's updated General Growth Properties thesis & we also detailed their original GGP presentation from when they first established the position

Assets reported on Ackman's 13F filing were $3.3 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source that seamlessly sorts through all the hedge fund portfolio maneuvers and backtests the performance (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, and Stephen Mandel's Lone Pine Capital. Be sure to check back daily for new hedge fund updates.

Bill Ackman & Pershing Square Enter Nestle (Investor Letter)

If you haven't seen it already, here's the latest investor letter out of Bill Ackman's hedge fund Pershing Square Capital Management courtesy of Dealbook. In it, we learn that Pershing has started a new position in Nestle as they previously did not own it. They think the company will boost margins going forward and has possible catalysts ahead. This all comes in addition to Pershing's recent entrance into Landry's Restaurants (LNY). (For the rest of Pershing's positions, we covered their portfolio earlier as well).

Arguably, the most important part of Ackman's investor letter is the section on General Growth Properties. Since it is no longer a reportable security for SEC filing purposes, it did not appear on Pershing Square's 13F filing. However, they still own unsecured debt and are also one of the largest equity holders in the name. Ackman overall provides very positive commentary and his position on the board of GGWPQ means he has been very much in the loop regarding all the bankruptcy emergence activity.

Ackman writes, "Once GGP has extended the substantial majority of its secured debts, the company will be well positioned to emerge from bankruptcy as an independent company. Alternatively, it might be sold to a strategic buyer or a private equity firm, or a U.S., foreign or other investment consortium, if a sale would achieve a higher value for GGP stakeholders. Despite this dynamic, we believe the stock trades at a substantially lower valuation than Simon Property Group because many market participants and other analysts have incorrectly assumed that GGP's unsecured creditors will meaningfully dilute shareholders' ability to achieve a substantial recovery ... We expect that GGP will be the second or third largest REIT by market cap once it emerges from bankruptcy and will therefore be a must-own company for all of the various REIT funds and index portfolios."

Pershing was up 12% for the third quarter of 2009 and is now up 24% as of the end of September. Embedded below is the entire investor letter from Bill Ackman's hedge fund firm Pershing Square Capital Management. Email readers you have to come to the blog to view the document:




As always, a nice in-depth look at the latest portfolio developments from Ackman's hedge fund and close followers of the General Growth Properties situation will be glad to see their positive comments on the ongoing situation. While Ackman is very upbeat overall, he does mention that there are still risks involved (obviously).

One last thing caught our eye in their investor letter and it pertains to their exposure levels. We found it worth pointing out that Pershing Square listed their long exposure at 93% and short exposure at 9%. While they typically have high net long exposure, we still found it interesting that they did not include credit default swaps (CDS) in their short exposure figures. As we've mentioned in our profile on Ackman & Pershing, they typically like to put on their short positions via CDS and their omission of CDS from their exposure levels throws us for a bit of a loop. In the letter, Ackman cites improving credit markets as a reason for CDS being less attractive and that they've seen a "substantial reduction in (their) CDS notional exposure." However, he also makes special note that this is not a macro bet and this is just how things have played out currently.

For more on Ackman's hedge fund Pershing Square, you can read up on how they've boosted their stake in McDonald's (MCD), you can check out their presentation on Corrections Corp of America (CXW), as well as their case for a short of Realty Income (O).

Bill Ackman's Pershing Square Boosts McDonald's Stake (MCD)

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Yesterday we kicked off our coverage with the most requested hedge fund by readers: Seth Klarman's Baupost Group. Today, we're continuing our coverage with another highly requested fund: Bill Ackman's Pershing Square Capital Management. Ackman is a well known value oriented and activist hedge fund manager who often takes large stakes in companies. For a more in-depth look at Bill Ackman, head to our profile of Pershing Square here.

Ackman's fund is good to track via SEC filings because he runs a very concentrated equities portfolio and typically holds the names for a longer timeframe. This way, the timelag associated with SEC filings is not detrimental to our coverage. Not to mention, Ackman typically takes larger stakes in companies which often require 13G or 13D forms to be filed so we are always on top of his portfolio maneuvers. And, our coverage of his portfolio via his latest 13F highlights just why it is prudent to monitor all SEC filings by any given manager.

Keep in mind that the positions listed below were their long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated last quarter):
Corrections Corp of America (CXW) - See Ackman's presentation on this play


Some Increased Positions (Positions they already owned but added shares to)
McDonald's (MCD): Increased by 243.6%
Target (TGT): Increased by 4.6%


Flat Positions (No change since Q2)
Greenlight Capital Re (GLRE)
EMC (EMC)
Borders (BGP)


Some Reduced Positions (Some positions they sold shares in)
Automatic Data Processing (ADP): Reduced by 15.7%


Removed Positions (Positions they sold out of completely)
n/a


Pershing's Entire Portfolio (by percentage of assets reported on 13F filing)

1. Target (TGT): 38.80%
2. EMC (EMC): 31.95%
3. McDonalds (MCD): 15.04%
4. Automatic Data Processing (ADP): 7.68%
5. Corrections Corp of America (CXW): 5.32%
6. Borders Group (BGP): 1.05%
7. Greenlight Capital Re (GLRE): 0.15%
   

As we mentioned earlier, Pershing Square runs a very concentrated portfolio. Target makes up the bulk of their holdings but keep in mind that much of that is due to their Pershing Square IV hedge fund that holds Target as its only position. The only new addition to Pershing Square's portfolio is that of Corrections Corp of America (CXW). We had already detailed his thesis behind this investment from his presentation at the Value Investing Congress. The other notable change to their portfolio was the boost in their MCD position and Ackman detailed some of his thoughts on this investment in his Q2 investor letter.

While SEC filings do not require funds to disclose short positions, we do know that one of Ackman's shorts is real estate play Realty Income (O). Previously, we posted up Pershing's presentation on O which laid out why he thinks it will have to cut its dividend, sending its retail investor base fleeing.

The fact that we know one of Ackman's shorts in addition to almost all of his longs has made readers wonder why investors are willing to pay management and performance fees for his hedge fund when the majority of his positions are readily disclosed. The counterpoint to that question would be the fact that you don't know *all* of his shorts, nor can you put on his positions that are institutional in nature. Typical investors usually don't have access to credit default swaps (CDS), a tool Ackman likes to use for putting on his short plays. And, in addition to his equity plays, Ackman also has various positions in the debt markets (General Growth Properties being a prime example). So, while you can create a semi-Pershing portfolio simply through their equity plays, you can't entirely replicate their portfolio solely through SEC filings.

Those of you avidly tracking the General Growth Properties (GGWPQ) situation will note that it is not present in this 13F filing. This is *not* because he has sold out. Pershing still holds GGWPQ debt and equity. It is simply not listed because the SEC has deemed GGWPQ to no longer be a reportable security for 13F filings. This is most likely due to the fact that they are no longer listed on the exchange (GGWPQ is traded in OTC markets). The main thing to take away from this is the fact that we will still see Ackman's moves in GGWPQ through Form 4 filings since he is now on the board of directors. For more info on their position, Ackman's Q2 investor letter briefly touches on GGWPQ here.

Post-13F, Pershing Square has also recently revealed a position in Landry's Restaurants (LNY) but due to the complex nature of that situation we will be penning a separate post on the details shortly.

Assets from the collective holdings reported to the SEC via 13F filing were $3.1 billion this quarter compared to $2.26 billion last quarter, a notable increase in assets invested in long equities. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio since their actual AUM is a figure much larger than what is reported on a 13F.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group so check back daily as we'll be posting up a new hedge fund each day.